The tax law has mistreated hobbies for a long time. But the most recent tax reform brings the grim reaper to the party, and it’s not pleasant. This means you need to focus on making your activity a business and not a hobby.
Under both prior law and the new law after the recent tax reform, your activity is either a business (for profit) or a hobby (not for profit). With the hobby classification, tax law makes you suffer. Your taxable gross income includes income from any source unless there’s a specific exclusion, and there’s none for hobby income. Thus, tax law taxes your hobby income.
You Don’t Need a Hobby to Have “Hobby Income”
Don’t think that you need a hobby to have what is called hobby income. In an article in Tax Notes titled “Potential Pitfalls for Direct Sellers,” author Monika Turek states that there are 15.2 million direct sellers who fall into the tax law–defined hobby category. Direct sellers include distributors for companies such as Amway, Herbalife, and Mary Kay. For sure, many of the 15.2 million are going to feel cheated by the recent tax reform. At the other end of the spectrum, you find many hobby-loss tax cases that involve doctors or lawyers who like racehorses or ranching. They too will feel cheated.
In conclusion, under the recent tax reform, the law taxes your hobby income and gives you a zero deduction for any business expenses to produce that income. That’s about as draconian as the law can get. The only out is to establish your activity as a business. This may or may not be possible, but it is certainly something I might be able to help you with and that we should discuss.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.